New Farm Bill Dairy Provisions Effective, But More Expensive

Dairy provisions in the 2013 farm bill, under consideration today by the Senate/House Conference Committee, are likely to be "very effective in providing catastrophic dairy margin insurance," says Marin Bozic, a University of Minnesota dairy economist.

He and colleagues from the Ohio State University released a policy brief today that outlines the potential benefits and costs of the proposed programs. You can read the full brief here.

"The costs of the new policies are estimated to be up to three times higher than the cost of extending the 2008 farm bill dairy programs, with a larger share of program benefits accruing to large farm operators," says Bozic. The Senate version, which includes a market stabilization program, aka a somewhat benign supply management, would reduce costs 5% to 30% compared to a stand-alone margin insurance program.

"If effective, the Senate stabilization program could also reduce the duration of low-margin periods," says Bozic. But here’s the conundrum: If the stability in net farm income is increased substantially, then farmers could respond with more milk production. That, in turn, could then decrease prices and reduce income over feed costs margins.

Who receives the most government support will also shift under the new program because there are no herd size limits. The economists estimate that herds with less than 100 cows received 42% of benefits under the now-expired Milk Income Loss Contract (MILC) program of the 2008 farm bill. Farms with more than 1,000 cows received just 6% of the MILC benefits.

Under the proposed policy, farms with less than 100 cows will get 17 to 21% of net program benefits, while herds with more than 1,000 cows would receive 36 to 43% of the benefits.

One problem identified by the economists is the sign-up deadline. The current proposal allows producers to sign-up on an annual basis immediately before coverage kicks in. But this would allow producers to strategically game the program, because they’ll know feed and market conditions going into the new coverage year.

This fact alone could increase program costs to the government and taxpayers by 20%. To create more uncertainty, the researchers suggest having a six month gap between sign-up and coverage start.